Wednesday, April 1, 2020

Has the market bottomed?

Last week, I had seen consecutive three day surge of all US major indices averaging nearly 22% gains which marks the best performance in a decade last week. As such, it is very normal for most of our viewers to think that the markets have bottomed and time to get into buy position for heavily discounted blue chip stocks.

The recovery I observed for the past week could be a technical one ("dead cat bounce") rather than the market hitting the bottom. We could be moving towards a new trading environment where price becomes volatile (whipsaws), with weaker markets hitting new lows while stronger markets start to find a more significant bottom.

Thus, with the best part of the initial market rebound behind us, I expect markets to work towards their way back to their March lows (as shown in Chart A).
Looking back at the carnage in 2008 (Figure 1), a typical rebound in a bear market ranges from 12% - 24.2% before testing for new lows.

Also, viewers need to understand that the direct effect of the virus is just the start. With lockdowns being imposed on the world ’s demand drivers, world trade growth is about to crash. The speed of decline will be matched only by the freeze in trade finance that occurred in the Global Financial Crisis.

Check out this week's episode of RHO Market Chat:

All posts and charts are for educational and illustration purposes only

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